Most home buyers and buyers of other types of property, such as automobiles, boats, intangible assets, and the like, obtain a loan from a mortgage loanee or other lender for some or all of the purchase price for the property. Referring particularly to mortgage loans, oftentimes the mortgage loanee sells the mortgage loan to a mortgage loan purchaser after the buyer closes on the purchase. In return for the sale of the mortgage loan, the mortgage loanee receives a fee from the mortgage loan purchaser. One reason mortgage loanees sell the mortgage loan is to ensure that they have funds to provide mortgage loans to future buyers.
The purchaser of the mortgage loan generally pools a number of mortgage loans, typically 1,000-1,500 mortgage loans, and securitizes the pooled mortgage loans. Securitizing the pool includes issuing a bond, and selling the bond to an investor where the collateral for the bond is the mortgage loans. Investors who have purchased an interest in the bond receive a payment, generally monthly, that is a portion of the aggregate of the payments made on the mortgage loans. Other purchasers hold mortgage loan pools indefinitely, where the purchaser remains the investor in the mortgage loans.
The investor purchases the bond with the hope that the yield over the life of the bond exceeds what was paid for the bond. Investors make money on mortgage loan pools, whether securitized or not, by acquiring them at a price that will bring a targeted yield. For example, a pool of mortgage loans that has a weighted average coupon of 9% will result in a payment stream of 8% (coupon less the fees paid to the servicer and trustee who administer the mortgage loans) as long as the mortgage loans remain outstanding. Most mortgage loans have a thirty year life. If the investor paid 100 cents on the dollar for the pool (for example, if a pool of ten mortgage loans of $100,000 each, with an aggregate balance of $1 million were acquired for $1 million), then the yield would be 8% (8% interest rate×$1 million). If the investor paid less, say 90 cents on the dollar or $900,000, for the same pool, then the yield would be more (8% coupon×$1-million face=$80,000÷$900,000 paid=8.8%).
Generally, investors pay less for mortgage loan pools that carry greater credit risk. Credit risk results from borrowers defaulting on their mortgage loans, i.e., not making payments on the mortgage loan. When this occurs, the mortgage loan is foreclosed, the property is sold, and the sales proceeds are used to pay off as much of the mortgage loan as possible. If proceeds are not enough to pay all of the mortgage loan off, then the difference is a loss. The investor's principal, or investment amount, is reduced by the loss. Thus, for example, the payment received becomes $72,000 (8%×9 loans×$00,000), on an investment that cost $900,000, which brings a yield of 8% ($72,000÷$900,000). The sales proceeds are also returned to the investor. If net proceeds were $20,000, then the investor's invested amount becomes $880,000 ($900,000 paid less returned proceeds of $20,000) and the yield is $72,000÷$880,000, or 8.2%.
Generally, foreclosure action may begin when a mortgage loan becomes 90 days delinquent, i.e., no payments have been made for 90 days. A typical loss for a foreclosed mortgage loan is 33%, which would result in a loss of $33,000 for the foreclosure of a $100,000 mortgage loan. When a mortgage loan is foreclosed, the servicer takes ownership of the property on behalf of the investor and then lists the property for sale. Generally, the list price is approximately the appraised value for the property. The servicer, however, will generally accept less than the listed price for the property in order to quickly sell the property. Realtors are aware of this, and typically counsel their clients to offer less than the list price, which is oftentimes accepted by the servicer and may result in a loss to the investor if the proceeds from the sale do not exceed the outstanding mortgage loan amount.
Another loss that is incurred by the investor stems from missed interest payments. Each missed payment, on an eventually foreclosed mortgage loan, results in a lost interest payment for the investor. However, the industry practice is for the servicer to continue to advance, or pay from its own funds, interest to the investors until the mortgage loan is ultimately foreclosed and the amount of the loss is booked. At that time, the servicer repays itself from the sales proceeds, and the difference is booked as a loss against the investor's investment balance. Accordingly, the longer a foreclosure process takes the more losses that are incurred. Moreover, the longer it takes to identify a mortgagor that is behind on his or her payment, and the longer it takes to assist the mortgagor in correcting his or her difficulty in making payment, if correction is at all possible, then the more likely that significant losses will be incurred if the mortgagor eventually cannot make the mortgage loan payments. Generally, all of the losses are ultimately passed on to the investors. The best result for the investor is when a borrower having difficulty making payments resolves the problem and does not default.
Investors typically have access to only aggregate statistics for a bond. For example, an investor may have access to a delinquency statistic for the entire bond, e.g., 3% of the mortgagors are behind on their payments. The investor, however, does not have access to information regarding each mortgage loan in the pool. Accordingly, the investor has no way of knowing with any certainty whether significant losses will actually be incurred. By not having detailed information, and a format in which to easily digest the detailed information, the investor must rely on generalized assumptions in assessing the performance of a pool. As an example, two identical pools could each have a single $100,000 mortgage loan in loss. Without any additional information, the investor would assume a 33% loss on each mortgage loan, or $66,000 in total, but would not know with any certainty whether the loss would actually occur. It is against this background that embodiments of the invention were developed.